Examples of Insurance Abuse: Father Poisons Son With Halloween Candy


     Near this time every year, I am reminded of this story.  And it demonstrates why insurance regulators and policy makers who are currently analyzing regulations on life settlements and “stranger owned life insurance” should consider the impact of human nature on those insurance transactions.  Insurance products are frequently abused by profiteers and life insurance policies pose a significant risk in the hands of the unscrupulous. There is no better example of this abuse than Ronald Clark O’Bryan.

     Ronald Clark O’Bryan had serious personal financial problems. He earned $150 per week, was eight months behind on his car payments and had total debts up to $100,000. In January of 1974, over his wife’s objection, he took out $10,000 life insurance policies on both of his two children. Later that year, over the objection of his life insurance agent, he bought additional $20,000 life insurance policies on his son and daughter.  By mid-October, both of his children were covered by several life insurance policies but O’Bryan had virtually no coverage on himself. It was also at this time that O’Bryan told a creditor that he expected to receive a large sum of money before the end of the year and extended his debt obligations into 1975.

     In August of 1974, O’Bryan, who worked as an optometrist, asked his manager for cyanide to clean gold glass frames—an unusual request considering that cyanide had not been used in the industry for over twenty years.  He also talked about the commercial uses of cyanide with his co-workers, as well as what dosages of the chemical would be deadly. After his request for the cyanide was denied, O’Bryan asked a friend (and employee of Arco Chemical Company) where he could buy cyanide and, “out of curiosity,” what doses would be fatal to humans. He finally asked how one could detect the presence of chemicals in a dead body. 

     Two weeks before Halloween, O’Bryan bought costumes for his children and appeared excited about taking them “trick or treating” even though he had never been excited about it before. A week later, he invited a friend’s family to dinner on Halloween night and suggested that the children from both families “trick or treat” together. 

     On Halloween, the families met for dinner as planned and then went “trick or treating.”  The group approached a house, only to find no one home. The children ran to the next home, but O’Bryan remained behind in the darkness for about thirty seconds.  He quickly caught up with the group holding “giant pixy styx” and exclaimed that the "rich neighbors" were handing out expensive candy. 

     When they returned home, O’Bryan’s son Timothy asked for one of the pixy styx. He took two gulps of the powder, complained that it tasted bad and began vomiting. He went into convulsions and was taken to the hospital where he died within an hour. Fluids taken from his stomach contained 16 milligrams of cyanide.  The level of cyanide in his blood was .4 milligrams.  A fatal human dose of cyanide is a blood level between .2 and .3 milligrams.

     On November 1st, O’Bryan met with the funeral director and learned that a separate death certificate was required to make a claim under each policy on Timothy’s life. He ordered six death certificates. He also described how he intended to use the insurance policy benefits and said the didn't see how the police could “pin” the death on anyone.

     O’Bryan was mistaken. The police did, in fact, pin Timothy’s death on him. O’Bryan was tried, convicted, and sentenced to death. He was executed by lethal injection on March 31, 1984.

     The story of Ronald Clark O’Bryan is horrific. It is almost impossible to comprehend how a person could murder his or her own child for life insurance proceeds. But examples of life insurance abuse, often equally horrific, are legion. And such examples speak volumes about how basic human nature, when presented with profiteering opportunities through life insurance, can produce unimaginable results. 


Will Chase And Wells Fargo Benefit From The Deaths Of WaMu And Wachovia's Former Employees?


     Washington Mutual and Wachovia have two things in common. First, they were spectacular business failures. Second, they were two of the nation’s largest holders of “bank owned life insurance” or “BOLI” policies. The combination of these two facts creates interesting issues concerning the legality of the BOLI policies and who may benefit from the deaths of the banks’ former employees.

     Bank owned life insurance generally refers to policies that a bank purchases on the lives of its employees. But unlike traditional forms of life insurance, the bank designates itself as the policy beneficiary—meaning that the bank is entitled to the policy benefits when the insured employee dies. BOLI policies also remain in force even if the insured person no longer works for the bank. The policies are therefore similar to those often referred to as “dead peasant” or “janitor” insurance.

     Washington Mutual and Wachovia had enormous appetites for BOLI policies. As of June 30, 2008, Washington Mutual reported to the Office of Thrift Supervision that it maintained $5.072 billion in BOLI holdings. Wachovia likewise reported a staggering $14.575 billion of BOLI holdings.  Notably, those amounts are reported in cash surrender value, meaning that the policies’ benefit amounts are likely substantially higher.

     Washington Mutual’s assets were acquired by JP Morgan Chase in September and Wachovia was acquired by Wells Fargo earlier this month. These transactions create interesting questions concerning the validity of the policies on the lives of the former employees and who may profit from their deaths. 

     Assuming that the Washington Mutual and Wachovia employees consented to the BOLI policies on their lives (a big assumption indeed), Washington Mutual and Wachovia may have had the insurable interest necessary to support the BOLI policies. But what about JP Morgan Chase and Wells Fargo? WaMu and Wachovia employees, especially former employees who left long before the collapse, probably never imagined that Chase and Wells Fargo might one day benefit from their deaths. Thus, two issues surface. First, who will receive the BOLI policy benefits when WaMu and Wachovia’s former employees die? Second, if Chase and Wells Fargo are the expected beneficiaries of those policies, do they have the insurable interest necessary to ensure the policies’ validity? 

 For more information on this topic, please contact any of the firm's partners at mmellp.com.

Life Settlements, STOLI Pose Potential Insurable Interest Problems

     Virtually every jurisdiction in the United States recognizes a person’s right to insure his or her own life and name another as the policy beneficiary, either through an assignment or express designation. The designated beneficiary or assignee is thereafter deemed to have an insurable interest in the insured person’s life by virtue of that designation or assignment. 

     In the context of life or viatical settlements, the requirement of an insurable interest is typically satisfied when the insured person assigns the policy to the purchaser. The insured person in a “stranger owned life insurance” or “STOLI” transaction may likewise satisfy the insurable interest requirement through designation or assignment. Thus, it is arguable that the beneficiary in both life settlement and STOLI transactions have an insurable interest in the insured person’s life because of the assignment—an act taken by the insured person himself.

     One matter absent from the current debate over life settlement and STOLI transactions, however, involves the maintenance of an insurable interest after a secondary transfer of the policy. Most contracts may be transferred time and time again. But life insurance policies are not like most contracts because the requirement of an insurable interest is a fundamental. It is therefore likely that the second (or third, or fourth) assignee of the life insurance contract will not have an insurable interest in the insured person’s life—the insured person did not assign the policy to the subsequent owner or name it as the policy beneficiary. And in many jurisdictions, the absence of an insurable interest renders the policy void as a wagering contract that violates public policy.


     To learn more about this topic, please contact any of the firm's partners at mmellp.com.

"No Win No Fee": What Does It Mean?

     “No Win No Fee” is a general reference to a contingent-fee agreement. A contingent-fee agreement is a contract between an attorney and client that describes how the attorney is to be paid for his or her work. Under a pure contingent-fee agreement, the attorney receives a fee only when the contingency is met—usually when the client recovers money from the opponent. Thus, “no win no fee” is an apt description. Without a recovery for the client, no fee is owed to the attorney.  It may also be referred to as a "success fee."  

     Except when prohibited by law (such as in criminal defense or some family law cases), contingent-fee agreements can be used in a variety of situations. It is important for the client to understand that, like most contracts, the terms of a contingent-fee agreement are negotiable. Negotiable terms may include the work the attorney is expected to do, the attorney’s percentage of the recovery, who will advance the case expenses, how those expenses will be subtracted from the recovery, and how any non-cash recovery will be valued. Because these terms are negotiable, the client who is shopping for legal services may want to have a disinterested attorney review the proposed contract to ensure that it meets the client’s needs.

     For more information this topic, please contact any of the firm’s partners at mmellp.com.

Legal In-sourcing: The answer to the "Value Challenge."

     I'm not a member of the Association of Corporate Counsel because I'm not an in-house counsel.  I am an advocate for affordable litigation, however, and I was delighted to learn from my friend Steve Matthews about the ACC and its "Value Challenge."  The challenge states:

ACC believes that many traditional law firm business models and many of the approaches to lawyer training and cost management are not aligned with what corporate clients want and need: value-driven, high-quality legal services that deliver solutions for a reasonable cost and develop lawyers as counselors (not just content-providers), advocates (not just process-doers) and professional partners.” 

     I totally agree.

     My firm advocates a litigation staffing model that answers the Value Challenge head on. In our website, we propose a solution that helps a company reduce the cost of litigation by bringing as much work in-house as possible. We call it “in-sourcing.” Forbes Magazine recently ran an advertorial about it. 

     The idea is that even in complicated cases, what the client really needs is the right trial lawyer in the courtroom. Much of the work that causes litigation to be so expensive, such as discovery, document review and production, and motion practice, can be handled in-house, by the client's own employees.

     In traditional hourly billing, everything is done by outside counsel and their staffs at very expensive rates. Starting salaries for baby lawyers are now as high as $180,000. Why should a corporate client pay hundreds of dollars per hour for the “education” of such lawyers at tasks that can be done better and cheaper by corporate employees?   The incentive should be efficiency, not opportunities for more hours and higher billings.   Outside counsel often charge millions of dollars to handle a single case. Is that really necessary? Certainly you need the right trial lawyer in the courtroom and to supervise your in-house staff on the case. But you don’t need all the extra baggage that usually comes with the services of a top-tier trial lawyer. 

     Unfortunately, we are not yet past the days of scorched-earth discovery and litigation tactics. Some litigants, encouraged by their hourly-compensated lawyers, refuse to play by society’s rules and get caught. A litigant and its outside counsel were recently sanctioned $4.3 million for “abuse of advocacy” in a patent case. Earlier this year that same litigant and a different firm were assessed $10 million for “misbehavior” in disregarding claims construction.  The Value Challenge sets a higher standard.

     So let's look at the Challenge again. What do corporate clients want and need?

“Value-driven, high-quality legal services that deliver solutions for a reasonable cost and develop lawyers as counselors (not just content-providers), advocates (not just process-doers) and professional partners.” 

     That’s what “Legal In-sourcing” does. Just hire what you need. Do everything you can in-house.  Get a high-quality, top tier trial lawyer.  Let him or her lead your in-house team one case at a time. Use his partners and staff only as necessary. Nurture talent and develop experience in-house. Use in-house staff to locate and produce documents, review documents produced by your opponent and make coding entries into trial software programs. Conduct legal research in-house. Write initial drafts of the motions, responses and briefs in-house. Take the routine depositions in-house. Use the trial lawyer and his staff only as necessary. We know that most cases get resolved before trial. Most of the labor-intensive work that is done before trial can be done in-house.

     The lead trial lawyer must, of course, remain involved at all times, but as a supervisor, not as a provider of the labor pool. This makes him and his firm true “professional partners” with the in-house staff on a case by case basis. 

     What does all this get the corporate litigant? Value-driven, high-quality legal services that deliver solutions for a reasonable cost, and develop in-house lawyers as counselors, advocates and professional partners. 

     At our firm, we call it “Legal In-sourcing.” It answers the “Value Challenge” perfectly!

Breath-taking Indeed--$180,000 Starting Salaries For Baby Lawyers

     How many litigants are willing, even if able, to pay high hourly rates so that big firms can pay “breath-taking” starting salaries to baby lawyers? According to the American Bar Association Journal, first-year law associates are being paid starting salaries as high as $180,000 per year. “As Economy Stalls, So Do Salaries … But Not Associate Hours,” ABAJournal.com, September 29, 2008.  And as those lawyers mature, their rates go up, not down. Guess who pays for that! Clients do.

     Perhaps that is why the average cost of a patent infringement lawsuit in Texas was $2,637,179 in 2005. “Report of the Economic Survey,” American Intellectual Property Law Association 2005, at p. I-109.  The little guy can’t afford to play in that league. Indeed, even some larger corporate litigants are saying “enough” to continually escalating costs of litigation.

     As a former chairman of the Court Costs and Delay committee of the State Bar of Texas, I have been concerned about controlling the high cost of litigation for more than two decades. That is why our firm handles patent and other complicated commercial litigation on contingency fee. The little guy has access to the legal system. The big guy keeps its costs down. The law firm, not the client, bears the cost of paying the lawyer salaries.   In the event of a “breath-taking” result, the client and lawyer share in the recovery. Law firms may choose to pay breath-taking salaries if they wish, but it should not be at their clients’ expense.

Examples of Insurance Abuse: An Employer Profits From Employee Deaths

     The appropriate use, or misuse, of certain life insurance products remains a hot topic of conversation. Earlier this year, Florida passed legislation about who may benefit from life insurance policies. The State of Washington recently banned “dead peasant” insurance. And more than twenty-five states are now analyzing regulations concerning life settlements and “stranger owned” life insurance.

     Policy makers addressing these issues should, first and foremost, consider the impact of human nature on transactions in which one may profit from the death of another. Human nature is a dangerous thing, writes George Will. There are few statements so consistently true. 

     Insurance products have been abused by speculators since the beginning of insurance itself. Life insurance is no different. And that vehicle, fueled by human nature, will always present a profit opportunity for the unscrupulous.

     One fascinating example of such unscrupulous speculation is a policy purchased by National Convenience Stores, Inc., the former operator of the Stop-N-Go chain of convenience stores. During the summer of 1991, NCS bought insurance on the lives of all its Texas employees. It also designated itself as the policy beneficiary and was entitled to $250,000 every time an employee died on the job. 

     At the time it bought the policy, NCS’ business was failing. It filed for bankruptcy protection just a few months later. In December of 1991, the company, according to one executive, “had no money in the bank.” 

     But while its core business was failing, NCS experienced a remarkable number of employee deaths. Six employees died during the policy term, mostly from robbery-related murders. NCS was paid $1.5 million in policy benefits. And because the policy premium was approximately $620,000, the bankrupt company profited by almost $900,000 because of employee deaths. The insurance broker who placed the policy and had to process the claims, suggested prayer a way to control the mounting losses.

     Notably, NCS decided not to invest in many safety devices because it stated that it could not afford them. It decided against bullet-proof glass and drop safes for stores in high-crime areas. It also decided against having multiple employees on duty during late-night hours when crime was highest. Once it emerged from bankruptcy, and after the policy term expired, NCS was acquired by a competitor that installed new safety devices. On-the-job deaths then decreased dramatically.

     The NCS example is worthy of consideration. Defenders of practices such as broad-based, leveraged, corporate owned life insurance often argue that the coverage poses no moral hazard because the corporate beneficiary would never murder its insured employees. But as the NCS policy demonstrates, murder is not the relevant inquiry. The relevant inquiry, the moral hazard, is whether one wagers on the early death of another. NCS made a substantial profit, not from murder, but by depriving its employees of a safe work environment.